David Hogberg of Investor’s Business Daily has uncovered another “quirk” in Obamacare, one with significant consequences. It turns out that millions of lower-income people who thought they were going to get coverage through Obamacare’s insurance exchanges may not. “There is this technical problem in the law,” Vanderbilt Law School professor James Blumstein told Hogberg. “I don’t see how you get around that.”

The exchanges are meant for those whose incomes are mainly between 100 and 400 percent of the federal poverty level (between $22,350 and $89,400 for a family of four in 2011), who are too wealthy for Medicaid, but otherwise unable to gain coverage through their employers. Obamacare requires states to set up regulated insurance exchanges, where qualified individuals will be able to buy government-sanctioned insurance plans, that will be subsidized on a sliding scale based on their income.

The difference between state-based and federally-run exchanges

However, many Republican-led states, such as Rick Perry’s Texas, are refusing to set up the exchanges, for a number of philosophical and political reasons I’ve described in previous posts. Under Obamacare, if a state hasn’t made significant progress in setting up its exchange by 2013, Section 1321 of the law allows HHS Secretary Kathleen Sebelius to come into that state and set up a federally-sponsored exchange instead.

But that’s where the glitch comes in. Section 1401 of the law, along with numerous other sections, refers to the “premium assistance” subsidy as being available only to taxpayers “which were enrolled in through an Exchange established by the State under [section] 1311 of the Patient Protection and Affordable Care Act.” (Emphasis added.) There’s no mention of subsidies being available to individuals who participate in exchanges established by the federal government.

The Treasury Department tries to work around the glitch

The Treasury Department, in proposed regulations I discussed here, appears to have elided the distinction between state-run exchanges (i.e., those described in Section 1311) and federally-run ones (Section 1321). “The proposed regulations provide that a taxpayer is eligible for the credit for a taxable year if the taxpayer…is enrolled in one or more qualified health plans through an Exchange established under [either] section 1311 or 1321 of the Affordable Care Act.”

The Joint Committee on Taxation, in its March 21, 2010 report on the law, stated that “individuals enrolled in multi-state plans, pursuant to section 1334 of the Senate amendment, are also eligible for the [premium assistance] credit.” And, indeed, Section 1334(c)(3)(A) states, “An individual enrolled in a multi-State qualified health plan under this section shall be eligible for credits…and cost sharing assistance under section 1402 in the same manner as an individual who is enrolled in a qualified health plan.”

But multi-state exchanges under Section 1334, which are established by individual states that contract with one another, are not the same as federally-imposed exchanges under Section 1321. I couldn’t find anything in the JCT report that specifically references Section 1321. Hence, if I haven’t missed something in PPACA, the Treasury Department is interpreting PPACA in a way that it doesn’t have the latitude to do.

Under the individual mandate, individuals will be forced to buy unaffordable insurance

What this means is that lower-income individuals in states without certified exchanges will be forced to buy insurance, via the individual mandate, but won’t get the subsidies designed to help make that coverage affordable for them. That seems ominous. But it also means that states who resist establishing exchanges have less risk of HHS coming in and imposing something upon them.

Meanwhile, The Hill’s Julian Pecquet reports that interest groups are pressing the Obama administration to fix one of the other tweaks in the law, the one that defines “affordable coverage” in an unexpectedly narrow fashion so as to prevent too many people from becoming eligible for the subsidies. Larry Levitt and Gary Claxton of the Kaiser Family Foundation estimate that the tweak will mean that as many as 3.9 million dependents of employed individuals will remain uninsured.

As I wrote back in August, this is a no-win situation. “Increasing the law’s costs will upset conservatives, but decreasing the law’s coverage expansions will upset progressives. Congress needs to get to the bottom of this.” Yet again.

UPDATE 1: I have confirmed that the JCT's technical explanation of PPACA does not address the eligibility of taxpayers for subsidies in federally-run exchanges under Section 1321, and that JCT has not addressed this issue elsewhere.

UPDATE 2: Jonathan Adler, writing at the influential legal blog The Volokh Conspiracy, agrees that Congress may have made a mistake, and that the IRS doesn't have the latitude to invent provisions where they don't exist:

The exchange-related provisions of the law were not written all-that-carefully. Nonetheless, federal agencies lack the authority to unilaterally revise statutory mistakes. (A point Cato’s Michael Cannon also makes here.) Congress may have wanted to make tax credits more widely available — just as it may have wanted those making less than poverty-level income to be eligible for exchanges as well — but that is not what Congress did.

The IRS may be inclined to argue that the failure to include a reference to federally run exchanges or Section 1321 in Section 1401 was a “scrivener’s error” that should be disregarded. But this is a difficult argument to make in this case for several reasons.

Jon goes on to address the issue of standing:

I should also note that I have not addressed what would happen if the IRS were to just go ahead and finalize regulations providing for tax credits beyond those authorized by the ACA’s text. Under such a scenario, standing to challenge the IRS’ action in court would certainly be a big issue. As a general matter, there is no standing for a taxpayer to challenge a tax benefit conferred upon someone else. But the IRS, like all federal agencies, has an independent obligation to comply with the law, and I do not know of anyone who has argued that the IRS may create tax credits at will just because it thinks that’s what Congress meant to do and such actions are not easily challengable in court. Just imagine the sorts of mischief such a doctrine could unleash.